What is Return on Invested Capital? Description

ROIC is an instrument that can be used for measuring the historical performance
of a business unit or of an entire company.

Discounted Cash Flow ultimately drives the
(future) value of any company (leading indicator). However, short-term cash
flow results are not useful for performance measuring, because cash-flows
are easy to manipulate. For example by delaying capital spending, by postponing
advertising campaigns or by decreasing R&D levels. ROIC is a lagging indicator;
it provides information on how a company has performed in the past.

Usage of Return on Invested Capital. Benefits

The ROIC model is often used to assess the value creation capabilities
of a firm or firms in an intuitive way. High (relative) ROIC levels are seen
as proof of a strong company and/or solid company management. However great
care should be taken. A high ROIC may just as well be an indicator of poor
management, caused by harvest behavior, by ignoring growth possibilities,
and by long-term value destruction.

Limitations of Return on Invested Capital. Disadvantages

Since Return on Invested Capital is an accounting-based measure, it suffers
the following potential concerns:

Can be manipulated by management,

Is influenced by accounting conventions and by changes in accounting
conventions, and

Is affected by inflation and currency exchange movements.

What can be said is that companies earning less than their Cost of Capital
usually can not create value by growing alone, unless their Return on Invested
Capital moves up above the Cost of Capital (WACC).

What is Return On Invested Capital (ROIC)?
In my understanding, ROIC = [Net Operating Profit - Adjusted Tax] / [Invested Capital].
ROIC is used to measure how well companis generate earnings from invested capital in their business. If ROIC is greater than WACC, it is creating value by in...